I’m Waiting…!!!

Bill Tatro

5/15/2014 12:01:00 AM

Periodically the Chief Market Strategist (CMS) at LPL Financial grabs the money headlines with dramatic pronouncements. I follow his Yoda-like pontifications for very personal reasons.

Several years ago the CMS and I shared a table at a wedding reception in Philadelphia for his cousin and one of my dearest friends. Of course, the conversation centered on the CMS’s most recent appearance on CNBC, his prediction of DOW 20,000 (it had just hit a new high of 14,000+) and how lovely the bride looked.

After an hour of 20,000 DOW was a given, the housing market was experiencing a little hiccup, people should be overweight in stocks, and the Federal Reserve was doing a really good job, I had had enough. I expressed my opinion (well documented in radio and print) that the storm coming was so dramatic that it would shake the foundations of our financial system. I mentioned a biblical phrase about a house being built on sand. The amount of debt and leverage was/is certainly sandy indeed.

The CMS laughed and simply said “If any of that happens, it’s always possible, but not probable, I’ll kiss your backside outside this hotel!” Hmmm!

Now my famous CMS prognosticator is back and says no bear market for 3 years. He bases his statement on a simple analysis of the yield curve. “Every recession over the past 50 years was preceded by the Federal Reserve hiking interest rates enough to invert the yield curve (long rates lower than short rates)….the peak in the stock market comes around the time of the yield curve inversion”.

I am sure the CMS took his analysis from the 67 economists ALL who predicted rising interest rates from April to the end of the year. “Even if long term rates stay at the very low yield of 2.6% to invert the yield curve by 0.5% the Fed would need to hike rates from around zero to over 3%”.

Unfortunately, our CMS, like the rest of the Wall Street strategists, can only see one way for interest rates to go and that is up.

However, what if the 67 economists are wrong and the 1 unasked economist, yours truly, is right and long rates fall, not rise?

10 YEAR TREASURY YIELD BREAKS KEY SUPPORT 5/14/2014

The inverted yield curve may come not from rising short rates but from falling long rates and make the bear market a whole lot closer than 2017.

I’d make a wager with our illustrious CMS but I’m still waiting to be paid from our last bet!